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CorpFin - Business Finance Mark Humphery-Jenner1 1 Tilburg...

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Business Finance Mark Humphery-Jenner 1 1 Tilburg University and University of New South Wales. Email address: [email protected] .
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Chapter 1 Discounting Notation P = Present value F = Future value i = Interest rate per period (year) N = Total number of periods (years) m = Number of sub-periods (i.e. months) I = Total amount of interest Types of Interest rates The types Nominal: Bank quotes this Annual effective: The correct annual rate of interest Periodic: The (correct) amount of interest per period Continuous: Paid all the time in continuous intervals 1
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Converting be- tween types Nominal to annual effective 1 + i aer = 1 + i nom m m (1.1) Where, i nom = Nominal rate i aer = Annual effective rate m = Number of periods Continuous to annual effective 1 + i aer = e r (1.2) Where, i aer = Annual effective rate r = Continuous rate Single Payment Simple Interest Future Worth: F = P (1 + Ni ) Present Worth: P = F (1 + Ni ) - 1 Interest: I = F - P = P (1 + Ni ) - P = PNi (1.3) Compound Interest ( F/P, i, N ) Future Worth F = P ( F/P, i, N ) F = P (1 + i ) N (1.4)
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